Complex Business Activity Schedules Create Unnecessary Rejections
New construction CRE development financings can become too complex for underwriters to understand. Failure is the only outcome.
Site acquisition risks, intended-use risks, construction program risks, development risks, fraud risks, financial reporting transparency risks, market risks, collateral risks, credit risks, completion risks, vendor performance risks, lien risks…
The list can go on and on and on…
Managing a complex development program that is not segregated into defined risk pools is a great way to drive up your expected cost of capital (if you are lucky) or a great way to immediately be rejected (if you are unlucky). Defined risk pool segregations of transactions create benefits you may not have considered, so consider these:
- All other things being equal, if you structure the transaction using the defined risk pool approach, the IRR on the developer’s capital would be expected to triple versus not segregating the transaction;
- Fewer balls in the air means fewer things to go wrong and that makes underwriters happy. If they are happy you might be happy. If they are unhappy you are out of luck;
Structured financing is worth the effort so use your creativity (or consult with someone who lives in this space) to create a better potential outcome for yourself as well as for the rest of the financial stakeholders. It could be that one thing that makes the difference in obtaining capital financing.